TaxPersonal TaxWealthy individuals could circumvent top tax rate rises

Wealthy individuals could circumvent top tax rate rises

The research looked at Labour’s 2017 election manifesto proposals to raise the upper tax rates and found it would not necessarily generate more tax revenue

Wealthy individuals could circumvent top tax rate rises

Raising the upper income tax rate to 50% would not necessary generate greater tax revenue, due to wealthy individuals amending their taxable income, according to research by the Institute of Fiscal Studies (IFS).

The research looked at Labour’s 2017 election manifesto proposals to raise the upper tax rates to 45% for income above £80,000 and 50% for income over £123,000, which Labour said would generate £4.5bn in tax take. IFS said this estimate was “a little on the high side”, but not “implausible”. IFS suggested the real figure would be closer to £1bn and £2bn a year in revenues.

To fully analyse the impact of raising the upper income tax bracket, IFS examined the tax rises of 2010-2011 under Gordon Brown, when the highest income tax rate was raised from 45% to 50% for income above £150,000. As the tax increase was announced a year in advance in 2009, with the government confirming it was a temporary measure, wealthy individuals were able to reduce their taxable income by using a practice known as forestalling – bringing their income forward to the year before the new tax rate came into effect, thereby circumventing the higher rate.

The rate returned to 45% in April 2013, with then Chancellor George Osborne determining it had done little to raise revenue. Forestalling would have also occurred prior to the rate reduction in 2013, with individuals forestalling by postponing receiving income until 2013.

IFS contend that had the tax rate been implemented long term, the forestalling would have “unwound”, and reported income would have returned to normal levels.

However, the Institute warns that this would not necessarily increase tax revenue either, as wealthy individuals could again adapt their income to circumvent it.

The Institue attempted to separate forestalling from the underlying impact of a raised tax rate, which “weakens the incentives individuals face to earn more and increases the pay-off to income shifting to other tax bases (such as capital gains) and other forms of tax avoidance or even evasion.”

IFS added: “the estimates suggest that this additional revenue would likely have come predominantly from those with incomes between £80,000 and £200,000, rather than those with the highest incomes.”

This applies specifically to wealthy individuals who are owners of their own businesses and therefore have greater control over moving their money, compared with high earning employees.

Overall, the IFS found estimating tax revenue to be imprecise due to the lack of predictability of the actions of wealthy individuals in response to tax changes. The IFS outlined other factors obscuring estimations, such as other economic policies impacting income.

IFS concluded: “Policymakers will therefore need to reconcile themselves to uncertainty about the revenue effects of changing the top rates of income tax” and “and be up front about it when ‘selling’ policies to the public.”

The government is clamping down on tax avoidance and evasion, and won 22 out of 26 tax avoidance cases in 2016-17 and increased the number of dawn raids  by 34% in five years.

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